Amec Civil Engineering Ltd. v Norwich Union Fire Insurance Society Ltd.

A Contractors All Risks policy covering loss of or damage to insured property does not ordinarily indemnify the insured for the cost of replacing work which is intact but fails to meet contractual specifications. Damage caused during removal of defective work does not found cover where the financial loss was caused by the original defective installation. An all-risks policy is not construed as covering the ordinary consequences of the insured’s voluntary commercial conduct. Where relevant, gradual deterioration means deterioration which progresses by degrees, rather than sudden and catastrophic deterioration.

AMEC claimed indemnity under a Contractors All Risks policy issued by Norwich Union. It had manufactured and installed reinforced concrete terrace blocks for sea-defence works in Jersey. A number of blocks had inadequate concrete cover over their reinforcement and were removed and replaced at a cost agreed for the action.

Norwich Union rejected the claim, relying principally on the policy’s defective-work exclusion. By the close of the trial, AMEC’s principal case was that the blocks were damaged when removed, with an alternative claim concerning rust staining in three blocks. The central issues were whether the policy covered the loss or damage alleged, whether rust constituted gradual deterioration within Exclusion 4, and whether any relevant defect was negligent within Exclusion 3.

1. The claim was dismissed. On the proper construction of the principal insuring clause, the policy did not cover the cost of replacing items manufactured by the insured which were merely defective or failed to comply with the contractual specification. The blocks remained intact and retained their original qualities. They were not lost and could not meaningfully be regarded as damaged merely because they were unsuitable for the particular works.
2. The damage allegedly caused by breaking out the blocks could not found liability. Even assuming that damage occurred during removal, it caused no financial loss. The financial loss resulted from the need to remove blocks which had already been defectively installed. The court approved and applied the principle stated by Hobhouse J in The Wondrous, Ikerigi CN SA v Palmer [1991] 1 Lloyd's Rep 400, that, absent express agreement, an insurance policy does not cover the ordinary consequences of the assured’s voluntary conduct arising from ordinary trading incidents.
3. The evidence did not establish that rusting caused the recoverable loss. Three rust-stained blocks were not required to be replaced, while replacement depended on the radar survey showing less than 50 millimetres of cover. In any event, the court stated that “gradual deterioration” in Exclusion 4 meant deterioration progressing by degrees, as opposed to sudden and catastrophic deterioration. Rusting of unprotected reinforcement would fall within that exclusion.
4. Although unnecessary to the result, the court concluded that AMEC had acted with the care and skill expected of a reasonably competent civil engineering contractor. Negligence could not be inferred simply from the number of blocks found below specification. The relevant inquiry required examination of the method used to secure the reinforcement cage and of whether the covermeter testing and interpretation were reasonably competent.

The action therefore failed and was dismissed.